Goldman Sachs (NYSE:GS) has a floating rate debt issue denominated in Australian dollars, which resets its coupon rate quarterly at the Australian Bank Bill Swap Reference Rate (BBSW) plus 0.51%, matures in 41 months, and currently indicates a yield to maturity over 8.50%. The high yield and shorter maturity of this Kangaroo bond, when considered with its solid A- rating and enviable position, compares extremely favorably in relationship to other high yield instruments in our Foreign and World Fixed Income holdings.
We believe that the dollar’s longer-term weakening trend against many world currencies remains a major concern for investors seeking protection against its devaluation and a further erosion of its buying power, and we continue to address the concerns of our clients in protecting existing wealth by utilizing the higher yields of sound issuers in many the world’s strongest economies.
Wealth Preservation Concerns
The equity and commodity markets continue thrashing about with no consistent or clear direction, and wealth preservation remains a top priority for many people. Declining equity and property prices, ultra-low interest rates, minimal pay raises, elevated inflation, ineffective politicians, potentially increased taxes, and the Fed’s constant printing of more money in what may be an effort to not only backstop the US economy but also that of Europe, have all precipitated into a widespread erosion of wealth that will likely continue until the aforementioned conditions begin to change.
With the euro-region economic confidence falling to a two-year low last week, talks in Brussels have moved towards forcing the 17 countries that use the euro to cede control of their sovereign spending to a central authority. Whether or not that is what is destined, it’s likely there will be more bumps along the way that allow for (or perhaps necessitate) the printing of more US dollars to insure the current financial system’s survivability.
Interestingly, the increase in US money supply has recently been accelerating. Up over 50% in less than 4 years (or about 11% per year), the more recent trends indicates a year over year increase over 20%, a 26 week rate indicating over 25%, and a 13 week rate indicating over 30%. At these accelerated rates, by 2015 perhaps a debt of only $17.6 trillion will quite magically appear as “reduced” according to most any politician’s measure, and the “banksters” will be ready for their next round of fleecing.
At Durig Capital, we have undertaken efforts to protect our clients' assets against the persistent destruction associated with an ever increasing supply of federal dollars, by scouring the globe in search of sound investments in the strongest global economies, and it is why we have chosen Goldman Sachs floating yield, short-term Australian dollar bond as this week's best bond.
Australia's abundant and diverse natural resources include extensive reserves of coal, iron ore, copper, gold, natural gas, uranium, and renewable energy sources. It also has a large services sector and is a significant exporter of natural resources, energy, and food. Key tenets of Australia's trade policy include support for open trade and the successful culmination of the Doha Round of multilateral trade negotiations, particularly for agriculture and services.
The Australian economy grew for 17 consecutive years prior to the global financial crisis. Subsequently, the Rudd government introduced a fiscal stimulus package worth over US $50 billion to offset the effect of the slowing world economy, while the Reserve Bank of Australia cut interest rates to historic lows. These policies - and continued demand for commodities, especially from China - helped the Australian economy rebound after just one quarter of negative growth.
The economy grew by 1.2% during 2009 - the best performance in the OECD - and by 3.3% in 2010. Unemployment peaked at 5.7% in late 2009 and fell to 5.1% in 2010. As a result of an improved economy, the budget deficit is expected to peak below 4.2% of GDP and the government could return to budget surpluses as early as 2015.
Although Australia has experienced persistent deficits since World War II, the estimated 2010 deficit of $30.4 billion, a mere 2.46% of GDP, bringing the total outstanding public debt to 22.4 % of GDP (2010 est.) The 2010 inflation rate stood at 2.9%, with current unemployment rates about 5.1%. Exports exceeded imports to the tune of 10.3 billion, with partners China, Japan, South Korea, and India all listed ahead of the US. The longer term outlook remains good as Australia's terms of trade appear to have reached record peaks with prices for key export commodities staying high thanks to voracious demand from China and the rest of Asia.
Public Debt to GDP
Australia in A$
A$ 20.3 billion
United States in USD
|100.0 %||US$ 1.294 Trillion||1.28 Trillion||1.94 Trillion|
Stanford University has rated the Australian economy number #1 on its global Sovereign Fiscal Responsibility Index. This recognition helped highlight how much stronger Australia’s financial condition is compared to #28 ranked (out of 34) United States, which came in only four points above a defaulted Iceland.
- 0.9805 (current)
- 1.0902 (2010)
- 1.2822 (2009)
- 1.2059 (2008)
- 1.2137 (2007)
- 1.3285 (2006)
About Goldman Sachs
The Goldman Sachs Group, Inc. is a global leader in investment banking and securities who engages in investment banking, buying and selling securities, asset management and many other financial services focusing on institutional clientele and high net worth individuals. Goldman Sachs' headquarters is located at 200 West Street, New York, and was founded in 1869. Former employees include Robert Rubin and Henry Paulson, who both served as the United States Secretary of the Treasury after resigning from Goldman Sachs, thus the nickname "Government Sachs."
Liquidity is of critical importance to companies in the financial services sector, and most failures of financial institutions have occurred in large part due to insufficient liquidity. Accordingly, Goldman Sachs has in place a comprehensive set of liquidity and funding policies that are intended to maintain significant flexibility to address both Goldman Sachs-specific and broader industry or market liquidity events. Management stated principal objective is to be able to fund Goldman Sachs and to enable their core businesses to continue to generate revenues, even under adverse circumstances.
To finance the firm’s business, Goldman Sachs issues various types of short- and long-term securities, including promissory notes, commercial paper, medium term notes and global bonds. It currently has about $835 billion in cash, $492 billion in debt, and its International bonds are solid Investment grade quality, being A- rated by S&P.
|Goldman Sachs Domiciled Bond||Yield||Maturity||Rated|
|US Dollar||4.70 %||06/22/2016||A-|
|Australia Dollar||8.55 %||04/12/2016||A-|
The default risk is Goldman Sachs’ ability to perform. Given its strong cash position, financial strength and evidently close political connections, it is our opinion that the default risk for this short- to medium-term bond is minimal relative to the currency risk of the Aussie dollar.
The currency risk of the Aussie dollar could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Australian economy.
Accessibility and Liquidity
Goldman Sachs currently maintains over $485 billion of outstanding debt, mainly denominated in U.S. dollars. Aside from owning various emerging market funds and ETFs that blend together various winners and losers into a mixed yield cocktail, the question arises as to how a retail investor might own or acquire individual, maturity definite Goldman Sachs Australian dollar denominated bonds. Many times broker/dealers require an institutional sized single bond purchase. However, with a broker and advisor's assistance, it is possible for a number of retail clients to be combined together in order to make a larger institutional sized purchase. Previously, we have been able to facilitate purchases as low as US $10,000.
We continue to search for individual corporate instruments denominated in the currencies of growing economies that yield higher than average returns to help protect our clients against the erosion of wealth that results from a constant devaluation of the US dollar. We acknowledge that a stronger US dollar would directly reduce the total returns of this Aussie bond. Conversely, if the US dollar continues on the longer term path of relative weakness to the Australian dollar that it has been on, this alone would add significantly to the already highly positive accruing returns of this bond.
Considering Australia’s long term position as a stable economy and political system with shrewd fiscal management will likely correlate with a stable and possible strengthening of the commodity based Australian dollar relative to the US dollar, we view the gaining of over 75% more yield from such a reputable issuer as Goldman Sachs as an incredibly compelling reason for choosing their Kangaroo bond over their similar Yankee (US dollar) bond. The combination of offering a remarkably high yield, some protection against a further loss of wealth with a continuation of the US dollar’s weakness against the Aussie dollar, and a diversification away from heavily overweight US dollar based assets into one of the world’s top tier fiscally conservative countries is why we are adding it at this time to our Foreign and World Fixed Income holdings.
- Coupon: 5.22% (changes quarterly)
- Ratings: A1/A-
- Maturity: 4/12/2016
- CUSIP: EF3458942
- Price: 88.0Current Yield to Maturity: 8.55%
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Some Durig Capital clients currently own these bonds.